After the credit crunch stymied its first attempt at a deal, JDA Software Group Inc. (NASDAQ:JDAS) played the waiting game before announcing its $396 million acquisition of supply chain company i2 Technologies Inc. (NASDAQ:ITWO) on Nov. 5.
The story here provides a prime example of how credit markets shut down deals and made valuation gaps seemingly unbridgeable.
Scottsdale, Ariz.'s JDA and Dallas' i2 detailed the negotiations in a filing with the SEC in a section commonly known as the "Background of the Merger" --
available here. According to the S-4 filing, in August 2007, as a result of contacts with Thoma Cressey Bravo -- the then-owner of preferred stock of JDA -- a draft nondisclosure agreement was sent to JDA to initiate discussions.
People speculated on why the deal fell through, saying that JDA may have tried renegotiating terms based on the credit markets. Also, as it talked with other potential buyers including private equity firms, there was a "Party M" that held discussions with i2 from July 2007 to June 2008 when negotiations ended because of a valuation gap. Party M, "whose products both competed with and complemented those of i2," came back in January but terminated discussions in March -- the same month markets bottomed out.
The JDA deal first stumbled in November 2007, when discussions did not advance because i2 and JDA failed to agree on the terms of a nondisclosure/standstill agreement. They came to terms in January 2008. During the first half of 2008, i2 continued discussions with JDA and others, with JDA dropping in and out of the process at various times. JDA announced a deal with i2 on Aug. 10, 2008, valued at around $346 million.
So why did the deal fizzle?
- On Oct. 30, 2008, -- a month after Lehman Brothers Holdings Inc. filed for the largest bankruptcy in U.S. history -- JDA received notice from its lenders of revised financing terms.
- JDA's board said the revised terms would have created unacceptable risks and costs to the combined company and tried to reduce the purchase price.
- I2 rejected JDA's new terms and on Nov. 6, 2008, approved the prior merger agreement.
- On Dec. 3, JDA terminated the deal and paid a termination fee of $20 million.
When the deal failed, i2 CEO Pallab Chatterjee left the company and was replaced by Jackson L. Wilson Jr. I2 then looked to previously interested parties, but the buying pool was smaller now and the bids were much lower. Wilson kept talking to JDA about structuring the deal so they could push the price up, possibly by prefunding the acquisition. But in March, JDA said talks were over "until financing sources became more readily available." The two didn't share words again until August.
During that time, i2 actually received some decent proposals from a private equity firm -- as much as $355 million. But then, along with the market, i2's stock started to recover, and it was looking for a better price. In August, Wilson met with JDA president and CEO Hamish Brewer, and the two began exchanging e-mails about valuation and making sure any announced deal will close since there was a sour taste left from the termination. And, of course, there was a lot of conversation about how to finance the deal -- many structures were proposed. On Oct. 17, 2009, JDA management determined that the Wells Fargo Parties' long-term financing proposal represented the best alternative with respect to a proposed transaction with i2 and determined not to pursue the financing proposal of Goldman, Sachs & Co. (NYSE:GS).
Eventually, JDA and i2 came to terms after due diligence and a little haggling a few days before the announcement. JDA tried to offer $17.55 per i2 share; i2 countered with $18.25, and JDA went up to $18 on Nov. 3. That seemed good enough. The closing price of the i2 common stock on the previous day was $16.17 per share.
Goldman Sachs was the exclusive financial adviser to JDA, which used DLA Piper US LLP as counsel. I2 tapped Thomas Weisel Partners LLC for financial advice and used Munsch Hardt Kopf & Harr PC for counsel.
According to The Deal Pipeline (subscription required), this merger agreement also provides for a $15 million
termination fee to be paid to JDA if Dallas-based i2 kills the deal, accepts a superior proposal or changes its recommendation. JDA will pay $7 million to i2 if approval by JDA stockholders is required but not attained, and it will pay the target $30 million if the deal does not close because JDA failed to obtain financing. -
Baz HiralalSee the background of the merger
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